Here's Why Shenzhen Inovance TechnologyLtd (SZSE:300124) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shenzhen Inovance Technology Co.,Ltd (SZSE:300124) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Inovance TechnologyLtd

How Much Debt Does Shenzhen Inovance TechnologyLtd Carry?

As you can see below, at the end of March 2024, Shenzhen Inovance TechnologyLtd had CN¥4.78b of debt, up from CN¥4.32b a year ago. Click the image for more detail. But it also has CN¥9.53b in cash to offset that, meaning it has CN¥4.75b net cash.

How Healthy Is Shenzhen Inovance TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen Inovance TechnologyLtd had liabilities of CN¥20.2b due within 12 months, and liabilities of CN¥4.60b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.53b as well as receivables valued at CN¥14.9b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Shenzhen Inovance TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥125.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Shenzhen Inovance TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Shenzhen Inovance TechnologyLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Inovance TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Inovance TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Shenzhen Inovance TechnologyLtd's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen Inovance TechnologyLtd has CN¥4.75b in net cash. And we liked the look of last year's 28% year-on-year EBIT growth. So is Shenzhen Inovance TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shenzhen Inovance TechnologyLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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